Chapter 8-2

Chapter 8
Tangible non current

assets • Capital and revenue expenditure
• IAS 16 Property, plant and equipment
• Depreciation
• Non-current asset disposals
• Revaluations
• Disclosure
Leading Excellence in Accounting and Finance

Overview - Purpose & Objectives
Capital versus revenue
Cost
expenditure
Tangible non-current
assets
Revaluations Depreciation Disposals
Straight line Reducing balance

method method
Capital and revenue expenditure 1
What is capital expenditure?
• Capital expenditure results in the acquisition of non-current assets, or an increase in their earning capacity. Capital
expenditure is not charged as an expense.
What is revenue expenditure?

• Revenue expenditure is incurred for the purpose of trade or to maintain the existing earning capacity of the non-
current assets.

Tackling the exam
It is highly likely that some questions in your exam will focus on the distinction between capital and revenue
expenditure.

IAS 16 Property, plant and equipment
The standard gives the following important definitions.
Non-current assets are assets which are intended to be used by the business on a
continuing basis and include both tangible and intangible assets.
Tangible noncurrent assets are those with physical form.
As per, IAS 16 Property, plant and equipment are tangible assets that:
• – Are held by an entity for use in the production or supply of goods or services, for rental to
others, or for administrative purposes
• – Are expected to be used during more than one period
• Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
• Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation and impairment losses.

Lecture example 1
Required
What examples of tangible non-current assets can you identify?

Answer to lecture example 1
• Examples include:
(a) Land and buildings
(b) Plant and equipment
(c) Motor vehicles
(d) Furniture and fittings, computers

Recognition Criteria
• it is probable that the future economic benefits associated with the asset will flow to
the entity,
• and the cost of the asset can be measured reliably.

Measurement
Initial measurement – at cost
• Components of cost
— Purchase price (including import duties, excl trade discount, recoverable sales tax)
— Initial estimate of dismantling, removing and restoration costs
— Directly attributable costs, eg site preparation, delivery and handling costs installation, assembly costs, testing
and professional fees, Staff costs arising directly from the construction

The following costs will not be part of the cost of property, plant or equipment unless they can be attributed directly
to the asset's acquisition, or bringing it into its working condition:
• Expenses of operations that are incidental to the construction or development of the item
• Administration and other general overhead costs
• Start-up and similar pre-production costs
• Initial operating losses before the asset reaches planned performances
• Staff training costs
• Maintenance contracts purchased with the asset
All of these will be recognised as an Expense rather than as part of the cost of the asset.

Class Activity 1
On 10 December 20X7 an entity bought a machine.
The breakdown on the invoice showed:
$
Cost of machine 20,000
Delivery costs 200
One-year maintenance contract 900
21,100
Further installation costs of $500 were also incurred.
Required
At what amount should the machine be capitalised in the entity's records?

Answer to Class Activity 1
$20,700
The cost capitalised should include the purchase price ($20,000) plus all directly attributable costs (delivery and
installation).
The cost of the maintenance contract should be shown as an expense in the statement of profit or loss.

Tackling the exam
Exam focus point:
Only staff costs arising directly from the construction or acquisition of the asset can be
capitalised as part of the cost of the asset.
The costs of training staff to use a new asset cannot be capitalised because it is not probable
that economic benefits will be generated from training the staff as we can't guarantee that
those staff will stay and use the asset. The costs of training staff should be expensed.
Watch out for this in your exam!

Specimen exam question
Source: ACCA FA/FFA Financial Accounting Specimen Exam

Specimen exam answer
Source: ACCA FA/FFA Financial Accounting Specimen Exam

• Subsequent expenditure
— Added to carrying amount if improves condition beyond previous performance
• Repairs and maintenance costs are expensed

Subsequent Measurement
IAS 16 allows a choice between
• Keeping asset at cost less accumulated depreciation
• Revaluing to fair value
Fair value may give fairer view on business.

Depreciation
Depreciation is the allocation of the depreciable amount of an asset over its estimated
useful life.
Depreciation for the accounting period is charged to net profit or loss for the period
either directly or indirectly.
Depreciable assets are assets which:

• Are expected to be used during more than one accounting period
• Have a limited useful life (period over which a depreciable asset is expected to be
used or number of production or similar units expected to be obtained from the
asset)
• Are held by an enterprise for use in the production or supply of goods and service,
for rental to others, or for administrative purposes
Depreciable amount of a depreciable asset is the historical cost or other amount

substituted for historical cost in the financial statements, less the estimated residual
value.

Depreciation 1
Depreciation – accruals concept
• Is a process of spreading the original cost of a non-current asset over the accounting periods in which its benefit
will be felt
Two methods
• Straight line
depreciation =
• Reducing balance
depreciation = cost × reducing balance%

Depreciation 3
• The double entry for depreciation is as follows:
DEBIT Depreciation expense (SPL)

CREDIT Accumulated depreciation (SOFP)

Depreciation 4
Change in expected life
• If after a period of an asset's life it is realised that the original useful life has been changed, then the depreciation
charge needs to be adjusted.
• Only current and future periods are affected; the change is not retrospective.
• The revised charge from that date becomes:
Carrying amount at revised date

Remaining useful life

Tackling the exam
Exam focus point:
If an exam question gives you the purchase date of a non-current asset which is part way through an accounting
period, you should generally assume that depreciation should be calculated in this way as a 'part year' amount, unless
the question states otherwise.

Non-current asset disposals 1
Disposal
• On disposal of an asset a profit or loss will arise depending on whether disposal proceeds are greater or less than
the carrying value of the asset.
• If proceeds > CV = profit
• If proceeds < CV = loss
Double entry for a disposal

• Eliminate cost
DEBIT Disposals
CREDIT Non-current assets
• Eliminate accumulated depreciation

DEBIT Provision for depreciation
CREDIT Disposals

Non-current asset disposals 2
• Account for sales proceeds
DEBIT Cash
CREDIT Disposals
or if part exchange deal
DEBIT Non-current assets
CREDIT Disposals
with part exchange value
• Transfer balance on disposals account to the statement of profit or loss.

Class Activity 2
A business buys a machine for $2,500. It is expected to have a useful life of three years after which time it will have
a scrap value of $250.
Required
(a) Calculate the annual depreciation charge.
(b) Calculate the cost, accumulated depreciation and carrying amount (CA) for each year of the asset's life. Note.
CA = cost – accumulated depreciation to date.

Straight line method:
2,500 ─ 250
Depreciation charge= = $750 per
3 years annum

Answer to Class Activity 2 (cont'd)
Accumulated
Year Cost CA
depreciation
1
2,500 750 1,750
2
2,500 1,500 1,000
3
2,500 2,250 250

Graphical representation
CA
$
2,500
250
Year
0 3

Class Activity 3
A business buys a machine costing $6,000. The depreciation rate is 40% on a reducing balance basis.
Required
Calculate depreciation expense, accumulated depreciation and carrying amount of the asset for the first three years.

Dep'n Dep'n Acc'd

Year CA
rate expense dep'n
1
40% 2,400 2,400 3,600
2
40% 1,440 3,840 2,160
3
40% 864 4,704 1,296

Graphical representation
CA
$
6,000
3,600
2,160
1,296
Year
1 2 3 4 5

Lecture example 2
Required
Using the information in Class Activity 2, show:
(a) The journal entry which would have been written at the end of the first year.
(b) The treatment of depreciation for all years in the relevant ledger accounts.
(c) The relevant statement of profit or loss and statement of financial position extracts for each year.

(a) Journal entry
Debit Credit
$ $
Depreciation expense 750
Accumulated depreciation 750
Being annual depreciation charged on machine

Answer to lecture example 2 (cont'd)
(b) Accounting for depreciation:
Machine (SOFP)
$ $
Cash 2,500 Bal c/d 2,500
2,500 2,500
Bal b/d 2,500

Depreciation expense (SPL)

$ $
Year 1 Accumulated dep'n 750 Year 1 SPL 750

Answer to lecture example (cont'd)
Accumulated depreciation (SOFP)

$ $
Bal c/d 750 Year 1 Depreciation expense 750
Bal c/d 1,500 Year 2 Bal b/d 750
Depreciation expense 750
Bal c/d 1,500 1,500
2,250 1,500
Year 3 Bal b/d 750
2,250 Depreciation expense 2,250

STATEMENT OF PROFIT OR LOSS (extracts):
Year 1 Year 2 Year 3
$ $ $
Expenses
Depreciation 750 750 750
STATEMENT OF FINANCIAL POSITION (extracts):
Accumulated Net Book
Cost Depreciation Value
$ $ $
(Year 1) Machine 2,500 (750) 1,750
(Year 2) Machine 2,500 (1,500) 1,000
(Year 3) Machine 2,500 (2,250) 250

Lecture example 3
The machine costing $6,000 in Class Activity 3 is sold in Year 3 for $3,000. No depreciation is charged in the year of
disposal.
Required
(a) Calculate the profit or loss on disposal of the machine.
(b) Complete the ledger accounts to show how the disposal would be accounted for.

Answer to lecture example
(a)
$
Sales proceeds 3,000
CA at end of year 2 (2,160)
840

(b)
Machine (SOFP)
$ $
Bal b/d 6,000 (a) Disposal account 6,000

$ $
(b) Disposal account 3,840 Bal b/d 3,840

Disposal account (SPL)

$ $
(a) Machine 6,000 (c) Cash 3,000
Balance = profit 840
on disposal (SPL) (b) Accumulated dep'n 3,840
6,840 6,840

Lecture example 4
Assume in Class Activity 3 that instead of cash proceeds of $3,000, there is a part exchange allowance of $3,000 on a
replacement machine costing $10,000.
Required
(a) Calculate the profit or loss on disposal of the machine.
(b) Calculate the amount of cash paid for the new machine.
(c) Complete the ledger accounts to show both the disposal and the acquisition.

(a) The profit on disposal is still $840, the only difference is that the proceeds were not received in cash, but in the
form of a part exchange allowance.
(b) Cash paid for the new machine is $7,000 ($10,000 – $3,000)

Old machine (SOFP)

$ $
Bal b/d 6,000 (a) Disposal account 6,000

$ $
(b) Disposal account 3,840 Bal b/d 3,840

New machine (SOFP)

$ $
(c) Disposal account 3,000 Bal c/d 10,000
Cash 7,000
10,000 10,000
Bal b/d 10,000

Disposal account (SPL)

$ $
(a) Machine 6,000 (c) New machine (part 3,000
Profit disposal (SPL) 840 exchange)
6,840 (b) Accumulated 3,840
depreciation
6,840

Revaluation
Accounting for a revaluation
A revaluation is recorded as follows:
DEBIT Non-current asset

(revalued amount less original cost)
DEBIT Accumulated depreciation
(total depreciation to date)
CREDIT Revaluation surplus
(revalued amount less carrying value)

Lecture example 5
A building costing $100,000 on which depreciation of $20,000 has been charged is to be revalued to $150,000.
Required
(a) Show the double entry to record the revaluation and make the postings to the ledger accounts.
(b) What would be the depreciation charge for the year if the building has a remaining useful life of 40 years?

(a) The double entry is
$ $
Dr Non-current asset – building (150 – 100) 50,000
Dr Accumulated depreciation – building 20,000
Cr Revaluation surplus 70,000

Building (SOFP)
$ $
Bal b/d 100,000
revaluation surplus 50,000 Bal c/d 150,000
150,000 150,000
150,000

$ $
Revaluation surplus 20,000 Bal b/d 20,000
Revaluation surplus (SOFP)

$ $
Building 50,000
Revaluation surplus 70,000 Accumulated 20,000
depreciation
70,000 70,000
Bal b/d 70,000

(b) Depreciation charge is
$150,000/40 years = $3,750

Tackling the exam 1
Exam focus point:
There was a question on revaluations in the December 2012 exam. This asked for the depreciation charge and balance
on the revaluation surplus at the end of the financial year, following a revaluation at the beginning of the year.
The examiner commented that this was one of the questions with the lowest pass rates that session. Students
correctly calculated the balance on the revaluation surplus but failed to identify the correct depreciation charge for the
year.

Tackling the exam 2
As the revaluation took place at the beginning of the year, a whole year's depreciation had to be calculated using the
revalued amount over the remaining useful economic life.
The remaining useful life needed to be calculated by working out the original depreciation charge and comparing this
to the accumulated depreciation brought forward to find out how long the asset had been held.
Students who answered the question wrongly had used the original useful economic life rather than the remaining
useful economic life figure.

Lecture example 6
1.1.X1 Asset cost $40,000
Estimated useful life five years
No residual value
1.1.X3 Total useful life revised to four years.
Required
Calculate the depreciation charge, accumulated depreciation and CA for each year of the asset's life (year end 31
December).

Review of useful life:

Year Depreciation Accumulated
charge depreciation CA
$ $ $
20X1 40,000/5 = 8,000 8,000 32,000
20X2 40,000/5 = 8,000 16,000 24,000
20X3 24,000/2 = 12,000 28,000 12,000
20X4 24,000/2 = 12,000 40,000 0
40,000

Lecture example 7
1.1.X1 Asset cost $40,000
Residual value $1,500
Useful life five years
Depreciation: 25% reducing balance
1.1.X3 Change depreciation method to straight line
Required
Calculate the depreciation charge, accumulated depreciation and CA for each year of the asset's life (year ended 31
December).

Change in method of depreciation:

Dep'n Accumulated
charge depreciation CA
$ $ $
20X1 40,000 × 25% 10,000 10,000 30,000
20X2 30,000 × 25% 7,500 17,500 22,500
20X3 (22,500 – 1,500)/3 7,000 24,500 15,500
20X4 7,000 31,500 8,500
20X5 7,000 38,500 1,500
38,500

Disclosure
With regard to disclosure, a proforma non-current asset note is shown here.
Land and Plant and

Total buildings equipment
$'000 $'000 $'000
Cost or valuation
At January 20X7 160 100 60
Revaluation surplus 20 20 –
Additions in year 50 30 20
Disposals in year (45) (15) (30)
At 31 December 20X7 185 135 50
Depreciation
At 1 January 20X7 30 20 10
Charge for year 7 5 2
Eliminated on disposals (3) – (3)
At 31 December 20X7 34 25 9
Carrying value
At 31 December 20X7 151 110 41
At 1 January 20X7 130 80 50

Chapter summary 1
1 Introduction
▪ Expenditure on non-current assets is often significant
and it is important therefore that it is accounted for
appropriately.

Chapter summary 2
2 Non-current assets
▪ Capital expenditure results in a non-current asset
being shown on the statement of financial position.
Revenue expenditure, such as repairs and maintenance,
is shown as an expense in the statement of profit or loss.
▪ Tangible non-current assets should initially be recorded
at cost. This includes the purchase price of the item
plus any directly attributable costs to bring the item
to its intended location and ready to use.

Chapter summary 3
3 Depreciation
▪ Depreciation is an expense charged in relation to the
asset each year to reflect the using up of the asset. Land
usually has an unlimited useful life and so is not
depreciated.

Chapter summary 4
4 Methods of depreciation
▪ Depreciation is usually calculated on a straight line or
reducing balance basis.

Chapter summary 5
5 Straight line method

▪ This method is suitable for assets which are used up
evenly during their life time. The depreciation expense is
the same each year.

Chapter summary 6
6 Reducing balance method

▪ This method is suitable for assets which generate more
revenue in the earlier years of their life. The depreciation
expense is higher in the initial years.

Chapter summary 7
7 Accounting for depreciation

▪ Depreciation is recorded by way of a journal entry. The
expense is recorded as a debit entry and reduces profit.
The credit is made to the accumulated depreciation
account and reduces the carrying value of the asset in
the statement of financial position.

Chapter summary 8
8 Disposal of non-current assets

▪ On disposal of a non-current asset the sales proceeds
are compared to the carrying amountof the asset in order
to calculate the profit or loss on disposal. Where an
asset is given in part exchange for another asset, the
part exchange allowance takes the place of the sales
proceeds.

Chapter summary 9
9 Revaluations
▪ An entity may choose to revalue its assets rather than
hold them at cost – this is a choice of accounting
policy. Where an entity revalues, it must revalue all
assets in the same class and the depreciation charge
is based on the revalued amount.

Chapter summary 10
10 Depreciation revisited
▪ If an entity changes the method of depreciation used
from straight line to reducing balance (or vice versa) or
revises the useful life of an asset it should write off the
asset's carrying amount using the revised method or
useful life.

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Chapter 8

Tangible non current

Leading Excellence in Accounting and Finance

Revaluations Depreciation Disposals

Straight line Reducing balance

What is revenue expenditure?

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Tangible noncurrent assets are those with physical form.

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Watch out for this in your exam!

Leading Excellence in Accounting and Finance

Source: ACCA FA/FFA Financial Accounting Specimen Exam

Source: ACCA FA/FFA Financial Accounting Specimen Exam

• Repairs and maintenance costs are expensed

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Depreciable assets are assets which:

Depreciable amount of a depreciable asset is the historical cost or other amount

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

DEBIT Depreciation expense (SPL)

Leading Excellence in Accounting and Finance

Carrying amount at revised date

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Leading Excellence in Accounting and Finance

Double entry for a disposal

• Eliminate accumulated depreciation

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• Transfer balance on disposals account to the statement of profit or loss.

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Straight line method:

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Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Dep'n Dep'n Acc'd

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Leading Excellence in Accounting and Finance

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Depreciation expense (SPL)

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Accumulated depreciation (SOFP)

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Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Leading Excellence in Accounting and Finance

Accumulated depreciation (SOFP)